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March 20, 2012

If Demographics Is Destiny, Economy Is Already Declining: Data Guru Short

On positive note, retirement advisors are in right niche, says Doug Short at RIIA conference

If a picture could tell a thousand words, Advisor Perspectives’ Doug Short, speaking at the Retirement Income Industry Association’s spring conference, probably hit the trillion mark.

Short, whose daily blog analyzes economic data from gas prices to unemployment, deployed his trademark graphs and charts on Tuesday to paint a picture of the demographic challenges ahead. While it is no simple thing to summarize, a long downward slope may give some inkling of the direction of GDP and household income, but on a positive note for financial advisors with the right demographics, Short (below) says “the focus on pre- and post-retirement planning will increase dramatically in the years ahead.”

Demographics was the key to Short’s presentation, and he used ample data from the Census Bureau and other sources to show just how profound has been the effect of population changes on the economy. The U.S. economy over the past generation has been riding a baby boomer wave – a wave that is now cresting. The 76 million births that occurred in the 19 years starting in 1946 have influenced everything in the U.S. economy.

For example, the ratio of services to goods in the economy changed from two to one in 1939 to 10 to 1 today; employment in services has grown 506% since 1939 compared to a 65% increase in the production of goods. In the broader economy, real GDP growth has averaged, since 1930, 3.34% a year. The current 10-year moving average is 1.17%. While the averages conceal ups and downs, with growth rates typically peaking before a recession, our current year-over-year GDP rate of 1.62% is historically low for a period of growth but reflects “the reality of the U.S. economy,” according to Short.

Slicing and dicing the data further, Short broke down the four key components of GDP: personal consumption; private domestic investment; net exports of goods and services; and government consumption – with special emphasis on personal consumption, which has long been the driver of economic growth.

What one sees through this demographic lense is the remarkable extent to which U.S. economic growth has tracked personal consumption growth, which in turn has closely followed the progress of baby boomers. The economy and markets were in growth mode when the boomers’ parents were raising their children, then paused until the boomers started turning 35 in 1981. GDP and the stock market surged from that point on, but really rocketed in the ’90s when the boomers hit their peak earning years at ages 45 to 54. At that stage, in the year 2000 and since, GDP and the stock market started heading down as personal consumption began to contract.

Using Census Bureau estimates for the next four decades, Short showed the age 45 to 49 bracket of consumers in their peak spending years is flat over the next 20 years and then declines, while the 65-plus population expands rapidly. Most categories of consumer spending are expected to fall, while prescription drugs and medicine expenditures will be rising. The number of dependent elders is expected to skyrocket in the next 20 years.

At the same time these demographic trends portend a weakening of GDP, growth in government spending threatens fiscal havoc. Short says the U.S. is already spending more in entitlements alone than it is taking in tax revenue, a trend former Obama Administration economic advisor Christine Roemer described as a “collision course with reality.”

Short concludes that declining personal consumption and an increasing federal debt burden are the economic headwinds against which policy makers today must act.